Flatex (after its online brokerage brand; previously FinTech) reported a 10% y-o-y increase in revenue in H119. Earnings fell 9% y-o-y to €8.6m (ROE 10.8%) but were +5% y-o-y after adjusting for securities write downs. The successful roll-out of online brokerage to the Netherlands contributed to management raising its FY19 EBITDA margin guidance from 29% to 31% in August. Flatex expects to expand into Spain in Q419. Based on consensus, shares trade at a discount to peers on both P/E and EV/EBIT.
H119: Steady progress
Transaction volume declined by 13% as trading in lower margin CFD and FX fell as expected. However, trading in higher margin products, such as ETP, are growing and revenue in the Fin division (which houses the brokerage business) grew 6.5%. The number of clients grew 14% y-o-y. The impact of the introduction of IFRS 16 boosted EBITDA by €1.4m (€19.7m reported, +7% y-o-y), but was earnings neutral because there was a corresponding offset in depreciation and interest expenses.
Good start in the Netherlands, Spain is next
In July, Flatex launched operations in the Netherlands, expanding out of its core markets, Germany and Austria. The objective was 20k customers by the end of the year in the Netherlands, but it secured 10k in just eight weeks as customers were attracted by zero fees (Flatex receives fees from its banking partners), integrated brokerage/banking platform and broad range of trading products. Spain is next and management expects the launch (forecast for Q419) to be even lower cost and more time efficient. It expects to expand into another two to three countries in 2020.
Strategic options being considered
Flatex announced in July that it has hired Lazard to help review its options to take best advantage of growth opportunities. These could include strategic partnerships, a possible partial sale of the company and the acquisition of new investors. This has led to some newspaper speculation, but no decisions have been taken.
Valuation: Discount for premium growth
Flatex is trading on a P/E of 21.9x for FY19 and 17.0x for FY20 on consensus forecasts. Both its FY20 P/E and EV/EBIT ratios are at significant discount to its B2B and B2C peer average. Consensus is expecting a strong H219; we believe the market is probably factoring in a successful international expansion.
Consensus estimates
Share price graph
Business description
Flatex (formerly FinTech Group) is an integrated online brokerage business. It covers two areas: technology and financial services, which includes a bank and a brokerage business.
FinTech renamed Flatex
In August 2019 FinTech changed its name to Flatex. Although the name FinTech benefits from some of the positive connotations of the fintech sector, management felt the image typically associated with that sector (start-ups with short trading history and usually still burning cash) was not appropriate and could be confusing. While there is a technology angle to the company, Flatex has been a cash flow generating company for many years and has a significant customer base. Flatex is the well-known brand of the core online broker business and the name also reflects its (‘flat’) pricing strategy.
International expansion
The successful roll-out of Flatex in the Netherlands that began in June 2019 contributed to management upgrading its FY19 EBITDA margin guidance to 31% in August after previously raising it from 27% to 29%. The attraction of zero fees, broad product range and good customer service has helped it gain market share. The partnership with the banks providing some of the traded products, essentially the exchange-traded products (ETP), allows Flatex to provide trading at zero cost to the customer.
Flatex is preparing to launch in Spain in Q419 with similar price and product strategy. It has earmarked Sweden, Italy and France as expansion targets for 2020.
In Germany and Austria, Flatex already has a very significant market share of nearly 25% in Germany and about 50% in Austria. International expansion therefore makes sense as a growth strategy, particularly given its efficient IT platform and capacity to deliver a low-cost advantage, which will only grow with greater scale. The company has been investing to optimise the platform for different markets, for example it is now available in five languages.
H119 results
Flatex reported H119 earnings of €8.6m, a 9% y-o-y fall. If we adjust the numbers for securities write downs, then earnings would have been +5% y-o-y at €9.5m.
Revenue was up 10% y-o-y, with the Financial (Fin) division growing 6.5% and the Technology (Tech) division growing 7.6%. Consolidation effects and other revenue led to the higher revenue growth numbers. Transaction volume was down 13% y-o-y and there has been a decline in lower margin contract for a difference (CFD, a form of derivative trading) and foreign exchange (FX) products. Management expected this following the agreement in which Commerzbank (DE:CBKG) took over Flatex’s CFD order flow execution as market marker. Flatex’s revenue growth is being delivered from higher-margin products, especially ETP.
The Tech division did relatively better than Fin on a year-on-year basis, helped by the advanced stage of the development of some of the projects. However, annual comparisons are somewhat difficult due to changes in the allocation of costs between the two divisions. The consolidation effect also knocks off 12% (€8.9m) of the combined revenue of the Fin and Tech groups. As a result, the divisional EBITDA margins shown in Exhibit 1 are understated. Management estimates that the Fin group is operating at a c 35% EBITDA margin and the Tech group at c 20%.
The number of customers continues to grow at a good pace (14% y-o-y), while customer balances grew 6% y-o-y. Earlier this year, the company expected to add 60k customers to the 290k customers it had at the end of 2018. In the first six months it added 23k and with the successful start in the Netherlands, and with Spain expected to launch in Q419, the company looks on track to deliver its 60k target and may indeed exceed this. The initial goal was 20k clients in the Netherlands in 2019, but 10k were achieved in only eight weeks.
IFRS 16 impact on numbers
The introduction of IFRS 16 (which governs the accounting of leases) affected Flatex’s H119 numbers, but the net impact on earnings was negligible (only €100k). IFRS 16 removes the leasing costs from the operating line and replaces it with depreciation of the capitalised leases (classified as ‘right to use’ assets and amounting to €8.3m) and financial expenses.
As such, IFRS 16 boosted Flatex’s EBITDA by €1.4m in H119. If it were not for IFRS 16, then EBITDA would have been flat y-o-y instead of +7.3% y-o-y. The IFRS 16 boost to EBITDA was offset by €1.2m in additional depreciation and €0.2m in financial expenses. On the balance sheet, the assets were offset by leasing liability with no impact on equity.
The cash flow shown is driven greatly by changes in customer cash deposits in Flatex’s banking operations. These are customer cash balances and therefore not a significant indicator of available cash. We have shown the debt position to give a better idea of gearing and we also note that the company disclosed that free liquidity was a comfortable €58m at end of H119.
Valuation
Flatex is trading on a consensus P/E of 21.9x for FY19 and 17.0x for FY20. Its FY20 P/E discount is more than 10% versus the average for both B2B and B2C peers. Flatex’s EV/EBIT ratios are also below the peer average. This discount seems interesting if consensus forecasts are achieved. Flatex’s consensus forecasts show above average growth in both revenue and earnings, reflecting its healthy balance sheet and good competitive position.